Goldman Gets the Message!

Last week Lloyd Blankfein, the CEO of Goldman Sachs, gave a speech to a group of institutional investors in which he called for new pay standards and regulation of hedge funds and private equity groups.

Back to the Future

When it comes to Wall Street pay standards, it might be called “Back to the Future.” These pay arrangements sound extremely similar to the culture that prevailed at the investment bank before it went public:

  • Compensation should be salary plus deferred compensation.
  • For senior employees, most should be deferred compensation.
  •  Performance evaluation should be over an extended period of time to avoid excessive risk-taking, at least three years.
  •  Senior executives should be required to hold most of their stock until retirement.

It almost seems as if he was taking advice from my blog.

Feels the Anger

Mr. Blankfein understands the anger that is bubbling to the surface from the general public. He saw this when demonstrators from Operation Pink penetrated security to protest his appearance and government bailouts of the banks.

If this anger continues, he could very well find that the government is his permanent partner in the banking business.

Self-Regulation is the Best Alternative

I have often said that corporations should lead the charge for accountability and self-regulation. If not, they will lose control to a regulator who may be representing a very angry constituency.
Mr. Blankfein understands this quite clearly. Goldman Sachs was very profitable as a private partnership, and no one accused Goldman partners of being underpaid.

By leading the charge to create new regulations, he is addressing public concerns and creating an environment in which Goldman can prosper big time.

Now that Goldman is a bank subject to regulation, he has every incentive to make sure that the shadow banking system is subject to similar regulation. It levels the playing field and restricts potential competitors.

Let the Banks Pick up the Tab First!

However, there is one issue that Mr. Blankfein overlooked - Who pays for the cost of things like the AIG bailout? Goldman benefited from this tremendously because it was a counterparty for AIG’s Credit Default Swaps (CDS).

It seems only appropriate if there are costs that the government bears, that Goldman and other banks pick up the tab instead of the taxpayer. Sheila Baird has already started this process by raising FDIC fees.

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